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Rajan's new index gives potential UPA allies more funds, and makes BJP-led states look less successful
Given that the Finance Commission (FC) controls around 54 per cent of the Rs 6 lakh crore that is to be distributed from the Centre to the states this year, the UPA cannot show significant generosity to states in exchange for political support. The Centre can come out with a Bundelkhand package or give more grants to Naxal-affected areas, but there is no room for a sustained increase in transfers to specific states. So, while the SP in Uttar Pradesh and the JD(U) in Bihar are linking their support to granting of "special category" status, which entitles them to more concessional funds, this needs to be ratified by the National Development Council (NDC) that comprises all chief ministers, and is not easy.
This is where the Raghuram Rajan-headed panel (from when Rajan was chief economic adviser) comes in handy. The panel was asked to develop a composite development index that could be used to transfer funds to states. Though the FC takes into account the backwardness of states, their relative inability to raise taxes as well as the progress they make on fiscal discipline, the Rajan panel decided to use another set of 10 variables. Some of these have been criticised in a dissenting note in the report — Bihar, for instance, has half Orissa's per capita income, but is considered less backward; Gujarat has the third-highest per capita income if you remove city-states like Delhi, but it is considered "less developed" by the Rajan panel. So if you take the non-FC mode of transferring funds, mainly through the Planning Commission, Bihar gets 7.42 per cent of the total transfers made to states and Rajan plans to raise this to 12.04 per cent. UP's funds are hiked from 10.09 per cent at present to 16.41 per cent.